Court reaffirms arbitral preconditions presumptively for arbitrators’ determination

In a much anticipated opinion, on March 5, 2014, the U.S. Supreme Court decided 7-2 to reverse the lower court and revive a $185 million arbitration award in BG Group PLC v. Republic of Argentina. The case began under the bilateral investment treaty (“BIT”) between the United Kingdom and Argentina. BG Group had acquired a majority interest in MetroGas, an Argentine natural gas distribution company, but the investment soured after Argentina enacted new tariff legislation in the wake of its 2001 economic crisis. BG Group ultimately convinced an arbitral tribunal in the United States that Argentina’s tariff legislation denied BG Group “fair and equitable treatment,” warranting $185 million in damages.

A central issue throughout the case was a BIT provision requiring disputes to be submitted to local courts for an 18-month period before initiating arbitration. BG Group did not satisfy the precondition, but the arbitrators decided that the failure did not impact their arbitral jurisdiction. After the award was issued, Argentina raised the precondition as a defense to BG Group’s petition to confirm the award and in support of Argentina’s request to vacate it. The district court agreed with the arbitrators, but the appellate court reversed. Siding with the district court, the U.S. Supreme Court approached the BIT as an ordinary contract and explained that disputes about “procedural preconditions for the use of arbitration” presumptively are for arbitrators to decide, while questions about arbitrability are left to the courts. Finding that the 18-month prerequisite fell into the former category, the Court held that the arbitrators had not “exceeded their powers” in deciding that they had jurisdiction.

For non-investor state arbitrations, the BG Group decision underscores the strategic importance of keeping in mind at the time the parties’ arbitration agreement is under negotiation – and before any dispute arises – whether courts or the arbitral tribunal will hear questions about arbitrability and preconditions to arbitration (as well as related factual questions, such as conduct-based waiver). Because arbitration is a creature of contract, the parties can bargain for mechanisms that work best for them. For investor-state arbitrations, the opinion shows that at least under certain circumstances, U.S. courts are willing to apply ordinary contract principles in reviewing bilateral investment treaties. And for both types of arbitration, BG Group’s affirmation that arbitrators are empowered to resolve all-too-important preconditions is yet another example of the preferred place that arbitration occupies in U.S. jurisprudence.